03/30/16   Fed Telegraph Working Better Than Expected

Editor’s Corner

Ron Rowland

Under the leadership of Ben Bernanke, the Federal Reserve made significant changes in how it conducts its business. More precisely, it made big changes in how it communicates its actions and intentions. Mr. Bernanke wanted, and delivered, a less secretive and more transparent Federal Reserve. While chairman, he pushed up the publication schedule for FOMC meeting minutes to three weeks in 2004 and held the Fed’s first-ever press conference in 2011.

He also strived for “plain English” in the policy statements and his speeches. This was in stark contrast to his predecessor, Alan Greenspan, who was noted for his ability to say a lot of words without really conveying much information. Greenspan’s seemingly deliberate obfuscation even had its own term—Greenspeak—which, according to one source, is “the coded and careful language employed by U.S. Federal Reserve Board Chairman Alan Greenspan.”

After a few early missteps, where markets misinterpreted what Mr. Bernanke had said, he vowed to be clearer in his communications and to avoid surprises by telegraphing the Fed’s intentions. The process is not perfect, and markets are still caught off guard at times, but in general, most FOMC meetings now lack any significant surprises. When Janet Yellen assumed the helm, she vowed to continue the openness and transparency instituted by her immediate predecessor.

Yesterday, Federal Reserve Board Chair Janet Yellen gave a speech to the Economic Club of New York. She suggested that the Fed may delay its next interest-rate increase even further than the delay implied at the conclusion of the FOMC meeting two weeks ago. The primary reason is the weaker projected pace of global growth in light of the economic slowdown in China and the breakdown in oil prices. Additionally, the current lack of inflation and prospects for future inflation reinforce her belief that it is “appropriate for the committee to proceed cautiously in adjusting policy.”

Markets interpreted this as good news and posted significant gains for the day. The momentum carried over into today’s market action. However, the portion of her speech that I found most interesting was the suggestion that by telegraphing its intentions, the Fed was successfully altering investor expectations, which are in turn providing the feedback necessary to help stabilize market action and reduce the need for large or unexpected changes to monetary policy. The Fed’s “baseline outlook for real activity and inflation is little changed because investors responded to those developments by marking down their expectations for the future path of the federal funds rate, thereby putting downward pressure on longer-term interest rates and cushioning the adverse effects on economic activity.” In another portion of the speech, she said negative economic “effects have been at least partially offset by downward revisions to market expectations for the federal funds rate that in turn have put downward pressure on longer-term interest rates, including mortgage rates, thereby helping to support spending.” The Fed seems to be pleased that its telegraph is working, and it is working well.

Investor Heat Map:3/30/16


Today marks the third week in a row that Health Care is the only sector in the red. Nine weeks ago, we were in an opposite situation when Utilities was the only sector in the green for three consecutive weeks. Now, here we are two months down the road and Utilities is still at the top. Granted, the sector hasn’t been in first place the entire time, but it never fell further than second place during the three occasions it was bumped from the top. Today, the dividend yield of Utilities helped it recapture the lead from Materials, which slipped to second. Two other yield-oriented sectors also improved their rankings: Real Estate climbed from sixth to third, and Telecom moved up a notch. Technology, Consumer Staples, and Consumer Discretionary all moved a step higher. Among the sectors losing ground, Industrials fell two spots, and Energy plunged from fourth to ninth. Health Care, as previously mentioned, is the only sector in red but is not exactly alone at the bottom. Financials is next to last for the fifth consecutive week and hasn’t been ranked any higher for eight weeks. Additionally, the last time it saw the upper half of the rankings was back in early December.


Mid-Cap Value and Mid-Cap Blend command the top spots again this week. An interesting arrangement has developed in the middle of today’s lineup with six style categories unable to differentiate themselves by more than two momentum points. Third-ranked Small-Cap Value down to eighth-ranked Mega-Cap are in an almost six-way tie for third place. This has the potential for small momentum differences to create large shifts in the resulting rankings in the weeks ahead. This week, the only changes were Small-Cap Value moving ahead of Large-Cap Value, and Large-Cap Growth swapping places with Mega-Cap. Value is outperforming Growth for all capitalization segments, and the market’s capitalization preference is for Mid Caps, followed by Large Caps. Mid-Cap Value is at the intersection of these two characteristics and is currently being rewarded. Small-Cap Growth and Micro Cap continue to lag.


Only one global category increased its momentum over the past week, and you will have to look hard to find it. Japan’s momentum score edged a point higher to five, which allowed it to climb out of the last-place predicament it found itself in a week ago. Despite all other categories losing momentum, there were very few changes in the relative-strength rankings. Latin America is heads above the crowd and managed to increase its margin over second-place Canada during the week. Emerging Markets and Pacific ex-Japan swapped places, with Emerging Markets now competing with Canada for second-place honors. Canada and Pacific ex-Japan produced the largest momentum declines (minus 13 points each) over the past week as commodity process moderated and their currencies ended the week unchanged. The U.S. is ranked fifth among the global categories, a position it has held for four consecutive weeks. World Equity has been closely following the U.S. in sixth during this same period. With most of the strength confined to the Western Hemisphere, the representatives of Europe and Asia are lagging. Although all have been in the green for three weeks, the categories of China, Eurozone, EAFE, Japan, and the U.K. continue to trail the field.



The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


“I continue to strongly believe that monetary policy is most effective when the FOMC is forthcoming in addressing economic and financial developments.”

-Federal Reserve Board Chair Janet Yellen in a speech to the Economic Club of New York (3/29/16)


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